Key political risks to watch in Mongolia
BEIJING, Sept 1 (Reuters) - Mongolia sits on vast quantities of untapped mineral wealth, the exploitation of which is likely to turn it into one of the world's fastest growing economies over the next decade.
Visiting the Mongolian capital Ulan Bator in late August, U.S. Vice President Joe Biden praised the landlocked nation's transition to democracy after years languishing on the fringes of the Soviet bloc.
The priority for Mongolia now is the development of its tiny economy, and foreign investors want to know if the government can maximise growth while handling the pressures exerted by impatient citizens as well as its two giant neighbours, Russia and China.
Following is a summary of key political risks to watch:
TAVAN TOLGOI FALLOUT
The Tavan Tolgoi or "Five Hills" coal mine is the world's biggest untapped deposit of its kind, and along with the giant Oyu Tolgoi copper mine, will help drive growth for decades.
Concerns about the ownership of the mine have caused delays, and Mongolia needs to act fast if it is to complete a much-anticipated initial public offering next year and fulfil pledges it made to voters before 2012 parliamentary elections.
Erdenes MGL, the mine's state-owned operator, has chosen banks to list the eastern part of the property , but timing will depend on the results of an auction for the western block.
In July, the government selected China's Shenhua , Peabody of the United States and a Russian-Mongolian consortium, but it then backtracked, saying the omission of Japanese and South Korean firms was an "oversight" and that nothing had been decided yet.
The confusion drew attention not just to the geopolitical pressures facing Mongolia, but also to its chaotic and opaque approval procedures.
What to watch:
-- Whether the government can produce an investment agreement for Tavan Tolgoi that will satisfy foreign partners and keep the public happy, and whether it can do it in time.
-- Whether foreign investors will be deterred by Mongolia's less than transparent approval procedures.
POPULISM
As elections loom, members of the ruling coalition want to get the deal done as soon as possible in order to deliver on expensive promises made to voters four years ago.
The government has vowed to use mineral wealth to pay for public education and health, and to use mining sector earnings to build infrastructure and modernise the country.
Still, many Mongolians have accused the government of selling mineral reserves cheaply to make quick cash.
A 2009 decision to hand a majority stake in the $6 billion Oyu Tolgoi project to Canadian miner Ivanhoe led to uproar, but many smaller foreign-invested projects have also raised the hackles of activists and lawmakers alike.
Biden's visit also brought concerns that Ulan Bator would sign a deal to store U.S., Japanese and South Korean nuclear waste. It could be a step too far for an electorate already unhappy about the growing role of foreigners in its economy.
What to watch:
-- How Mongolia uses the proceeds from its mining projects. It has set up education and fiscal stabilisation funds, but it has also promised direct dividends for Mongolian citizens.
-- How it deals with rapid economic change as foreign investment transforms the country's mainly rural economy. Overall investment in Oyu Tolgoi alone will stand at roughly the equivalent of the country's entire GDP in 2009.
-- How the government handles growing nationalist sentiment, and fears about the role of foreign firms and workers.
DEPENDENCE
Many of Mongolia's 2.7 million citizens are concerned about growing Chinese and Russian hegemony, and their fears were not allayed by the plan to hand the majority of Tavan Tolgoi's western block to Chinese and Russian interests.
China already dominates Mongolia's economy, buying 90 percent of the country's exports in the first half of 2011, mostly at discount. But if Mongolia is going to stand a chance of easing its long-term dependence, it needs cash -- and that will only come from trade with its southern neighbour.
Mongolia's growing dependence on Russia and China for fuel, power and transportation also poses a major risk to its mining sector. Russia has been known to turn off supply taps, and China is not averse to closing crucial railway links .
Mongolia also depends on Russia's railway network to fulfil plans to deliver coal to Japan and South Korea.
What to watch:
-- Will efforts to ease dependence on China merely increase Russia's hold, and vice versa? Is the Chinese market for coal and other minerals its only option in the short term?
For a feature on the wrangling over the Tavan Tolgoi project, click here:
To read a multimedia special report on the Oyu Tolgoi copper and gold deposit, click here: r.reuters.com/nas97p (Editing by Daniel Magnowski)
Visiting the Mongolian capital Ulan Bator in late August, U.S. Vice President Joe Biden praised the landlocked nation's transition to democracy after years languishing on the fringes of the Soviet bloc.
The priority for Mongolia now is the development of its tiny economy, and foreign investors want to know if the government can maximise growth while handling the pressures exerted by impatient citizens as well as its two giant neighbours, Russia and China.
Following is a summary of key political risks to watch:
TAVAN TOLGOI FALLOUT
The Tavan Tolgoi or "Five Hills" coal mine is the world's biggest untapped deposit of its kind, and along with the giant Oyu Tolgoi copper mine, will help drive growth for decades.
Concerns about the ownership of the mine have caused delays, and Mongolia needs to act fast if it is to complete a much-anticipated initial public offering next year and fulfil pledges it made to voters before 2012 parliamentary elections.
Erdenes MGL, the mine's state-owned operator, has chosen banks to list the eastern part of the property , but timing will depend on the results of an auction for the western block.
In July, the government selected China's Shenhua , Peabody of the United States and a Russian-Mongolian consortium, but it then backtracked, saying the omission of Japanese and South Korean firms was an "oversight" and that nothing had been decided yet.
The confusion drew attention not just to the geopolitical pressures facing Mongolia, but also to its chaotic and opaque approval procedures.
What to watch:
-- Whether the government can produce an investment agreement for Tavan Tolgoi that will satisfy foreign partners and keep the public happy, and whether it can do it in time.
-- Whether foreign investors will be deterred by Mongolia's less than transparent approval procedures.
POPULISM
As elections loom, members of the ruling coalition want to get the deal done as soon as possible in order to deliver on expensive promises made to voters four years ago.
The government has vowed to use mineral wealth to pay for public education and health, and to use mining sector earnings to build infrastructure and modernise the country.
Still, many Mongolians have accused the government of selling mineral reserves cheaply to make quick cash.
A 2009 decision to hand a majority stake in the $6 billion Oyu Tolgoi project to Canadian miner Ivanhoe led to uproar, but many smaller foreign-invested projects have also raised the hackles of activists and lawmakers alike.
Biden's visit also brought concerns that Ulan Bator would sign a deal to store U.S., Japanese and South Korean nuclear waste. It could be a step too far for an electorate already unhappy about the growing role of foreigners in its economy.
What to watch:
-- How Mongolia uses the proceeds from its mining projects. It has set up education and fiscal stabilisation funds, but it has also promised direct dividends for Mongolian citizens.
-- How it deals with rapid economic change as foreign investment transforms the country's mainly rural economy. Overall investment in Oyu Tolgoi alone will stand at roughly the equivalent of the country's entire GDP in 2009.
-- How the government handles growing nationalist sentiment, and fears about the role of foreign firms and workers.
DEPENDENCE
Many of Mongolia's 2.7 million citizens are concerned about growing Chinese and Russian hegemony, and their fears were not allayed by the plan to hand the majority of Tavan Tolgoi's western block to Chinese and Russian interests.
China already dominates Mongolia's economy, buying 90 percent of the country's exports in the first half of 2011, mostly at discount. But if Mongolia is going to stand a chance of easing its long-term dependence, it needs cash -- and that will only come from trade with its southern neighbour.
Mongolia's growing dependence on Russia and China for fuel, power and transportation also poses a major risk to its mining sector. Russia has been known to turn off supply taps, and China is not averse to closing crucial railway links .
Mongolia also depends on Russia's railway network to fulfil plans to deliver coal to Japan and South Korea.
What to watch:
-- Will efforts to ease dependence on China merely increase Russia's hold, and vice versa? Is the Chinese market for coal and other minerals its only option in the short term?
For a feature on the wrangling over the Tavan Tolgoi project, click here:
To read a multimedia special report on the Oyu Tolgoi copper and gold deposit, click here: r.reuters.com/nas97p (Editing by Daniel Magnowski)
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